Capitalism: A Reversible Mistake?

In the United States “capitalism” is often equated with “Americanism,” so that to criticize capitalism is to be unpatriotic.  One suspects that such an attitude has not arisen “naturally” but, rather, has become widespread as a result of promotional efforts by those having a vested interest in the status quo—a consequence of such promotion being that even many of those not having such a vested interest have become staunch supporters of capitalism.  The fact that so many have an almost “religious” commitment to capitalism means, of course, not only that (a) few are brave enough to offer negative comments regarding capitalism, but that (b) there is little reason to have hope that capitalism can be replaced—or even reformed.1

Although there is a distinction between capitalism as a set of ideas and “on the ground” capitalism, many in our society seem to believe that the set of ideas regarding the nature of capitalism is, in fact, realized “on the ground.”  That is, for many in our society there is no discrepancy between the “theory” of capitalism and its reality.  Although it may be extremely difficult to correct this common perception—misperception, actually—it may, nonetheless, be of value, to note—as I do here—the flawed nature of the “theory” of capitalism—in the hope that if some come to recognize the “obvious” flaws in capitalist “theory,” they will abandon it—or at least reduce their devotion to it.

I suspect that people vary in why they are committed to the capitalist “model” (a more apt term than “theory”):

  • Some realize that it is seriously flawed, but sense that it serves their interests, and therefore embrace and promote, it.
  • Some accept it out of a superficial understanding regarding what it actually “says.”
  • With some such individuals there may be psychological reasons why they “latch onto” the model:  It gives them a sense of comfort, security, a sense that they know something that others don’t, etc.
  • Etc.

In discussing the capitalist model, a useful starting point is to recognize that (a) “free enterprise” is a term that briefly captures what the model is “about,” and also recognize (b) the circumstances that provided the motivation for its development.  Regarding the latter, John Kilcullen has stated:

The free enterprise movement began in the 18th century as a protest against various restrictions on business enterprise imposed by governments and by corporations sanctioned by government.  Corporations (guilds, colleges, companies, universities) had existed since Roman times, ostensibly to guarantee their member’s good behaviour, and especially good service to the public.  But they served their members’ interests also at the expense of the public by restricting competition. Non-members were excluded from the trade; to become a member one had to serve a long and low-paid apprenticeship to an established member, and to pay various sums of money (for entry fee, graduation fee, compulsory gifts and banquets, etc.). Government sanctioned these practices, and imposed restrictions of its own, ostensibly in the public interest, but also to raise revenue and to provide fees and bribes for officials: the guild had to pay for its monopoly.  Viewed cynically, government was an ancient and successful branch of organised crime, a respectable protection racket.

That is, the free enterprise movement did not arise “out of thin air;” rather, it arose in response to particular real-world conditions that existed.  Ironically, however, the model that was developed of capitalism was formulated with universalistic principles (as we shall see shortly).

Both of these facts are important, for they illustrate the fact that theories/models that are created—and perhaps especially ones involving humans—often (always?) reflect the time in which they are created.  That fact implies that over time a given theory/model might very well become increasingly obsolete, “necessitating” the development of a new theory/model.  In fact, however, a given theory/model often continues to live on “past its time”—especially if the elite benefits from the theory/model.  Which would seem to explain why the capitalist model is still with us!

I asserted above that the capitalist model was formulated with universalistic principles—and that that also reflected the time in which it was developed.  Let me next, then, develop this point—as it is of extreme importance, in that it is the basic reason why the capitalist model is deeply—and “obviously”!—flawed.

The first point to note here is that Adam Smith [1723 – 1790] is usually given credit for the initial formulation of capitalist “theory”—although Smith never himself used the word “capitalist.”2  Given Smith’s role in developing the capitalist model, a good starting point in acquainting oneself with the “flavor” of Smith’s thought is to examine the following statement, which appears in his The Theory of Moral Sentiments (1759): 3

The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining.  The rich only select from the heap what is most precious and agreeable.  They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements.  They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.  When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.  These last too enjoy their share of all that it produces.  In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them.  In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.

This passage is notable for being the first of only three times that Smith used “invisible hand” in his writings.4

We can “glean” from this passage Smith’s beliefs that:

  • The rich are naturally selfish and rapacious.
  • By implication, then, the poor and those with middle income do not have those characteristics—which is odd because it raises the question:  How can some individuals be “naturally” one way while other individuals are not that way?!  Are we not all members of the same species?!
  • The rich have “vain and insatiable desires.”
  • Everyone consumes about the same amount, with the rich consuming just a little more.  Given, however, that the rich have “insatiable desires,” the question that arises is:  If the rich have “insatiable desires,” how are they able to suppress those (natural?) desires and curb their consumption?!
  • The rich act on the basis of “their own conveniency”—meaning, presumably, that in acting, they look only to their own interests, and are selfish (i.e., keep all of that which they acquire for themselves).
  • Despite the fact that, in acting, the rich look only to their own interests, they “are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.”  That is, despite the fact that the rich act only with their own interests in mind, because of the operations of an “invisible hand”—i.e., some sort of external force—their actions result in the advance of “the interest of the society.”  (Miracle of miracles!)

Unfortunately, Smith failed to make clear —what the nature of that “invisible hand” was, nor did he make clear how the actions of that invisible hand managed to benefit all members of the society.5  In effect, we are asked to have faith in this mysterious “invisible hand”—without any good reasons being offered as to why we should!  If that is not a weakness in Smith’s thinking, I don’t know what is!

According to Smith:

When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.  These last too enjoy their share of all that it produces.

“Providence” is, of course, a theological concept, one definition being:

In theology, divine providence, or providence, is God’s intervention in the world.  “Divine Providence” (usually capitalized) is also used as a title of God.  A distinction is usually made between “general providence”, which refers to God’s continuous upholding the existence and natural order of the universe, and “special providence”, which refers to God’s extraordinary intervention in the life of people.[1]  Miracles generally fall in the latter category.[2]

I assume that Smith’s concept of “providence” was of the “general” type—i.e., he thought of “God” in a “Deistic” sense 6  —so that it was God’s “doing” that the earth became divided “among a few lordly masters”—but that God also ensured that everyone would “enjoy their share of all that” earth produces.

Although Smith seemed to claim that it was Providence that provided the “invisible hand,” whose “handiwork” enabled everyone to “enjoy their share of all that” earth produces, in actuality it appears that his thinking was strongly influenced by Newtonian mechanics—which suggests that for Smith the “invisible hand” was actually something analogous to the force of gravity.7

Isaac Newton [1642 – 1727] had publicized his cosmological ideas a few decades prior to the publication of Smith’s On the Wealth of Nations (1776).  Ironically, it has been argued8 regarding Newton himself that (in 1931, in a paper delivered by Nikolai Bukharin of the Soviet Union in London):

far from being a work of pure scientific scholarship isolated from the social conditions of the time, Newton’s experiments, theories and the framework in which they were set—their paradigms therefore, in [Thomas S.] Kuhnian language—had been shaped by the new economic demands of England’s rising merchant class.

This suggests that Smith may have sensed that Newtonian mechanics would provide him with a “theoretical” basis that would be useful to the “rising merchant class.”  Thus, although Smith’s concept of an “invisible hand” may have been derived directly from Newton, the ideas of both Newton and Smith may have been “shaped by the new economic demands of England’s rising merchant class”!

At any rate, it has long been recognized that the model that Smith developed reflects Newtonian mechanics (a fact that I elaborated upon in my “Dissecting Laissez-Faire Thinking,” 2011).  And it is of interest that George Soros recently repeated this claim:

Ever since the Crash of 2008 there has been a widespread recognition, both among economists and the general public, that economic theory has failed.  But there is no consensus on the causes and the extent of that failure.

I believe that the failure is more profound than generally recognized.  It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics.  It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge.  That is what economic theory has tried to ignore.

But why, more specifically, was it a serious mistake to use Newtonian mechanics as the (tacit) basis for developing the capitalism model?  In addressing that question, let me begin by noting that laissez-faire is also (i.e., like “free enterprise”) a term closely associated with capitalism, and that such thinking can be summarized briefly as consisting of the following assumptions:

1. The individual is the basic unit in society.

2. The individual has a natural right to freedom.

3. The physical order of nature is a harmonious and self-regulating system [thereby reflecting Newtonian mechanics].

4. Corporations are creatures of the State and therefore must be watched closely by the citizenry due to their propensity to disrupt the Smithian spontaneous order.

The fourth of these assumptions tends to be ignored nowadays, however, and I would add that “harmonious” should be interpreted as meaning that as individuals pursue their individual interests in a Smithian manner, the result will be that “everyone will ‘enjoy their share of all that’ earth produces.”  The capitalist model contains other features, but what I would like to focus on here is the model’s conclusion—“everyone will ‘enjoy their share of all that’ earth produces”—and some of the assumptions contained (tacitly) in the model—assumptions which, because of their utter lack of realism, render that conclusion invalid.  Meaning that if one were to replace the assumptions contained in the model with ones having realism, the model would “produce”9 the rotten economic situation that now exists in this country!

Let us, then, identify and comment upon several key assumptions that lie behind Smith’s conclusion, assumptions which, because of their lack of realism, can be thought of as “destroying” Smith’s conclusion:

1.  Not only is the individual the basic unit of the society (society itself being a fiction—at least in the sense of being powerless as an affecting agent),10 but all individuals are the same—in intelligence, skills, interests, “connections,” etc.  This (tacit) assumption obviously reflects Newtonian mechanics—and is also obviously utterly lacking in realism. There is, then, no reason to believe that in the real world everyone acts in their interests.

2. Individuals vary not only in their “objective” characteristics, but how they perceive things—a factor that also plays a role in their behavior, and also has relevance for whether, and how well, one pursues one’s interests.

3. A third flaw in the “theory” is that the “if” in “if individuals pursue their interests” tends to be interpreted in two different—and conflicting—ways:

  • Individuals do, in actuality, act in such a manner as to pursue their interests.
  • Individuals should act in a manner that advances their interests.

To argue that individuals do, in fact, act to advance their interests, is to make a statement that “flies in the face” of how people do, in fact, behave.  And to argue that people should so act is to make a normative judgment that—by its very nature—lacks “truth value.”

This last point is worth pursuing.  Typically, “pursuing one’s own interests” is interpreted as acquiring as much in the way of material goods as one can, and then consuming those goods (but sharing some of one’s goods with one’s family members11 —for an assumption of the model is that one’s happiness/well-being comes from, and only from, the consumption of goods (and services).  Thus, to share with others (outside one’s immediate family) would be to reduce one’s own happiness/well-being—and it would be irrational to do so.

That assumption is patently untrue.  As has been said well by Fred Guerin:

We know today, from abundant empirical, sociological, psychological, genetic, archaeological and anthropological evidence, that [Thomas] Hobbes’ [1588 – 1679] theory of human nature as intrinsically “selfish” is deeply flawed.  We are not “naturally” selfish—though we can, indeed, learn to be so.  In other words, within a capitalist system it can become true over the course of time that an elite few will be chiefly oriented by greed, narcissism or selfishness—and some of the latter not so very far from the “squeezing, wrenching, grasping, scraping, clutching, covetous old sinners!” Dickens describes Mr. “Scrooge” as in A Christmas Carol.

Given that humans are actually Good Natured, insofar as individuals in our society are greedy, aggressive, selfish, etc., this is partially because we live in a large-scale society, but primarily because our society, having developed in response to Capitalist notions (rather than ones of a religious nature!) gives such characteristics “survival value” (more accurately, “success value”).12

It should be clear from the above discussion that capitalism was a mistake; the question that I asked in the title of this essay, however, is whether or not it is a reversible mistake.  Individuals such as Thomas Piketty seem to think so, but my response to that is:  Dream on! Which means (referring to a statement that I made near the beginning of this essay) that whether one comes to realize the flaws in Capitalist “theory,” and then abandons it, is of little matter, for I have a firm belief that capitalism as a real-world phenomenon is nearing its end.

Here is my reason for writing that (a statement by John Davies):

The world is probably at the start of a runaway Greenhouse Event which will end most human life on Earth before 2040.

However, Guy McPherson, in commenting on this statement has said:

He [Davies] considers only atmospheric carbon dioxide concentration, not the many self-reinforcing feedback loops described below [in Guy’s essay].

In the Introduction to his Going Dark (2013) McPherson had said:

Shortly after the arrival of the 21st century I realized we were putting the finishing touches on our own extinction party, with the shindig probably over within a few decades.

Two years ago, McPherson wrote:  “A decade ago, as I was editing a book on climate change [his Going Dark book, I assume], I realized we had triggered events likely to cause human extinction by 2030.”  What lends credence to McPherson’s statements is that he is now retired, and can feel free to state what he truly believes.

In conclusion, then, capitalism can be neither replaced nor reformed—for the simple reason that processes are currently in operation that are likely to decimate the human population severely, if not render it extinct.  When I wrote my “It’s Later Than You Think” a few months ago, I had a fair amount of optimism, and even provided a link to an article that I had written in 1984 (!) that presented a strategy for societal system change—a strategy which, if it had been implemented, would have meant no ecological crisis today.  However, the events that have transpired since then have led me to the conclusion that there is no hope for us humans now—neither via geo-engineering (“insane,” per Al Gore), nor finding a “safe” location.

  1. Fred Guerin recently stated; e.g., that Thomas “Piketty’s assumption that we could ever regain control over an “endless inegalitarian spiral” by imposing a progressive tax on capital seems, is at best, rather fanciful.”  Guerin was referring here to Piketty’s recent (2014) Capitalism in the Twenty-First Century.  That is, Guerin questions Piketty’s assumption that capitalism can be reformed. []
  2. It has been said that “’capitalism’ was a word and a phenomenon neither used by, nor known to, Adam Smith.  Capitalism was a wholly late 19th-century experience.  The Oxford English Dictionary (Vol II, p 863) locates its first usage in English in 1854 by William Makepeace Thackeray in his novel, The Newcomes.” []
  3. This particular edition was published in 1984, edited by D. D. Rafael and A. L. Macfie, the quotation occurring on pp. 184 – 184.  It’s not clear which of the editions published during Smith’s life was the basis for the Rafael-Macfie edition of the book. []
  4. In Book IV, Chapter II, paragraph IX of The Wealth of Nations, the “invisible hand” occurs in this statement:  “By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.  Nor is it always the worse for the society that it was not part of it.  By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” []
  5. Except for some discussion in Chapter 7 of Book I. []
  6. However, “Anglo-American economist Ronald Coase has challenged the view that Smith was a deist, based on the fact that Smith’s writings never explicitly invoke God as an explanation of the harmonies of the natural or the human worlds.[60]  According to Coase, though Smith does sometimes refer to the “Great Architect of the Universe“, later scholars such as Jacob Viner have “very much exaggerated the extent to which Adam Smith was committed to a belief in a personal God”,[61] a belief for which Coase finds little evidence in passages such as the one in the Wealth of Nations in which Smith writes that the curiosity of mankind about the “great phenomena of nature”, such as “the generation, the life, growth and dissolution of plants and animals”, has led men to “enquire into their causes”, and that “superstition first attempted to satisfy this curiosity, by referring all those wonderful appearances to the immediate agency of the gods.  Philosophy afterwards endeavoured to account for them, from more familiar causes, or from such as mankind were better acquainted with than the agency of the gods”.[61] A point that I would add here is that Smith’s use of “it” in this quotation in referring to Providence seems to suggest that the thought of Providence as a force rather than a divine Being. []
  7. What lends credence to this assertion is Smith’s use of the word “it” with reference to Providence (see endnote 6 above). []
  8. Steven Rose, Lifelines:  Biology Beyond Determinism, 1998, p. 51. []
  9. Perhaps with a little additional “tinkering.” []
  10. Put another way, contextual variables play no role in affecting the behavior of individuals. []
  11. Given the tacit assumption in Smith’s model that only individuals exist, it is “illegal” to bring the “family” into the picture!  But we must—for the simple reason that if the only social unit is the individual, reproduction may or not occur.  But if it does occur, any children born would receive no care, because it would not be in one’s interest to care for children!  As a result, the “initial population” would be the only population, for all of the members of the initial group would eventually die, and would have no replacements! []
  12. In an essay that I wrote two years ago—and in discussing our inequality problem—I argued that the fact that the family is our primary societal unit is a major explanatory factor.  I would add now that it is the major reason for most of our problems—including the fact that capitalism “came on the scene”! []

Al Thompson is retired from an engineering (avionics) firm in Milwaukee. His e-mail address is: torjesen74@gmail.com. Read other articles by Alton.